Ludwig von Mises Institute

Chapter 24
Of the Balance of Trade

In our zeal to maintain the principle of human freedom, we must not overlook important errors which are being extensively advocated, and bid fair to become permanently a part of the government policy. One of these is the doctrine of the "balance of trade" teaching that an excess in the currency value of exports over imports is an aggregate of commercial balances of account against foreign countries; while an excess of imports over exports is an aggregate of commercial balances in favor of foreign countries. The former, it is argued, should be increased, and the latter prevented as much as possible by legislation. Hence we find a high tariff maintained with the view of checking imports.

Yet, if this method of calculating increasing wealth is reliable for a nation, why is it not equally reliable for an individual? If the nation gets rich by parting with more value than it receives, why should not the individual get rich whose expenditure exceeds his income? The philosophy of the balance of trade, as set forth by its advocates, comes to this ridiculous conclusion, that a cargo exported, costing $100,000 according to the customhouse records, which returns only $80,000 in the imports, gives a national gain of $20,000. What does the merchant owner think about it? By the same rule, were the cargo sunk in the ocean, it being an excess of exports altogether, it must be reckoned as $100,000 clear profit to the country!

One of the advocates of this doctrine states that he finds the balance of trade in favor of the United States in the excess of exports for a series of years to be as follows:

	Total Exports	Total Imports	Excess of Exports
1854-55 ..........................	$275,156,846	$261,468,520	$13,688,326
1855-56 ..........................	326,964,908	314,639,942	12,324,966
1856-57 ..........................	302,960,682	360,890,141	2,070,541
1857-58 ..........................	324,644,421	282,613,150	42,031,271
1858-59 ..........................	356,789,462	338,768,130	18,021,332
1859-60 ..........................	400,122,296	362,163,941	37,958,355
1860-61 ..........................	410,856,818	352,075,535	58,881,283
1861-62 ..........................	229,790,280	205,819,823	23,970,457
1862-63 ..........................	331,809,459	252,187,587	79,621,872
Total excess of exports			$288,568,403

After giving this table, the writer encourages the country with the consideration that "the scale of excess of exports established in 1854-55, rises gradually and steadily to 1863. Its average for the last two years, the worst of the war, is $51,800,000 each year. Its average for the two years preceding the war, 1858-59 and 1859-60, was $28,000,000 each year only." This statement includes the mutual exchanges of gold. And, being desirous to make the largest admissible exhibit of the excess of exports, he repudiates the idea that the paper prices of exports affect the result, and furthermore maintains that the export commerce is habitually returned short; the inference being that if strict accuracy were obtained, the "favorable balance of trade" would be considerably more than the above figures.

To all such reasoners the question should be put, when, where and how is this continually extending balance of trade to be collected and discharged. Is it sufficient for the nation to have it constantly accumulating, and never get anything for it?

In England the account and the argument are directly the other way. For example, the British imports in 1854 amounted to £152,380,053; exports £115,821,092, the excess of imports being £36,567,961. In 1860 the imports were £233,626,830; exports £191,205,421; excess of imports £42,421,418. In 1863 the imports were £248,980,942; exports £146,602,409; excess of imports £102,278,533, while in 1864 the imports were £269,246,000, and the exports £160,809,698, making an excess of £108,809,698 of imports. Thus in these four years there is an excess of imports amounting to about twenty hundred millions of dollars; or about five times the total of the exports in any one year from the United States to all the world.

Now can anyone be so mentally blind as to suppose that Great Britain is running in debt to other countries at this rate, or that she is pursuing her foreign commerce at a prodigious loss? A more probable argument might seem to be that Great Britain imports raw material to a great amount, augments its value by her industry, exports the manufactured article, and finds her profit in the returns.

Thus we see that this whole matter of the balance of trade is very much of a delusion, as it is generally presented and understood. Its significance is in the international value of money and in restraints upon commerce. Cheap money means high prices. Duties on imports operate in the same direction, and the nation afflicted with these disabilities works to a disadvantage, except in the case of money cheapened by mining, which, being capital, is exported (when in natural excess) in exchange for other capital, and is thus a source of national wealth like everything else produced cheap for foreign commerce, that is to say, in excess of the home demand. California and Australia produce money cheap because of their natural advantages for its production; and as cheap capital they supply their wants with the excess of money as our Western States supply their wants with their cheap capital in the excess of wheat. The great affair is to produce cheap capital of the most desirable and exchangeable character. It matters little whether it be money or merchandise.

The community possessing the most capital in relation to population will have the cheapest capital, and the lowest general prices, unless their value is disorganized by a false currency, or artificial arrangement and restrictions of trade, and they will have the advantages of all the rest of the world in foreign commerce. With lower general prices they will produce cheaper than other communities; their foreign adventures will cost less, and bring greater profits; and these profits will appear in an excess of imports. This is the true balance of trade; it is no debt, but a balance of profits; an accumulation of capital in foreign trade.

England has this "balance of trade" in her favor; hence her continued excess of imports, and this excess will continue to increase under the free trade system and limited currency; while under our high tariff exclusive system and expanded currency we shall have the "balance of trade" the wrong way in excess of exports, giving England the advantage in international commerce continually.

A relative of the writer travelling in Europe at this time says he has purchased four suits of clothes for ninety dollars in London which would have cost him two hundred dollars in New York or Boston, as he took particular pains to ascertain the prices here before he left home. This, allowing 50 per cent for the premium on gold, is obtaining a value of one hundred dollars by our gold measure, for sixty-six and 67/100 dollars in England. Suppose this to be the average rate at which the necessaries and conveniences of life can be obtained in England, as compared with the United States, then it is not merely possible but probable, that a cargo for export may be obtained in England for sixty-seven thousand dollars that would return the value of one hundred thousand dollars; yielding thirty-three thousand dollars profit in the excess of imports over exports; while a cargo of the same relative value here would cost one hundred thousand dollars in gold, and return simply its cost. Hence England would make a profit of thirty-three per cent in foreign trade where the United States would make nothing at all. Yet if the customhouse records even exhibit an excess of exports, it does not follow that there is any absolute loss to this country in the business, since we export overplus products only, and whatever we obtain for them, more or less, is in a national point of view clear gain. That is to say, we support ourselves, pay all our expenses of living and of production, and have these surplus products left. They are of no value except for export, and the returns they bring us are therefore national accumulation and profit.

An explication will make this point clear, and show the fallacy of this doctrine of the balance of trade. Let us suppose that by an expansion of currency through banking, or government paper issues, we make general prices here fifty per cent higher than they are in England; it would follow that the same quantity of labor and capital which would produce a barrel of flour in this country for six dollars would produce the same value in broadcloth, say a yard, in England for four dollars; in other words there would be this difference in prices for the same value in the respective countries of all commodities. Then suppose England sends us an invoice of 1,000 yards of broadcloth which is entered in our customhouse records at the aggregate price of $4,000, and, being sold here under our inflation so as to produce the net sum of $6,000 we return an invoice of 1,000 barrels of flour at the aggregate price of $6,000; where and what is the balance of trade? There is no such thing. The 1,000 barrels of English broadcloth costs the United States 1,000 barrels of flour, and the 1,000 barrels of United States flour costs England 1,000 yards of broadcloth; neither more nor less. The account is closed. England owes nothing for the difference, because values are exchanged, not prices, and this difference of $2,000 is mere price, the result of an artificial depreciation of the value of money in this country. The two nations gain equally by the exchange, since surplus products are supplied to each other of equal value. Money, being the thing tampered with by adulteration, remains untouched in this transaction, as between the two parties to the exchange, and has no more to do with the balance of trade than an equal value of beef, or corn, or wine, which remains untouched in either country.

But suppose, what is very sure to happen, that England takes $6,000 of gold instead of 1,000 barrels of flour for her broadcloth; then she takes our artificially depreciated commodity, and gets $6,000 of money for a real money value in broadcloth of $4,000, which we raise in price to $6,000 by adulterating our currency. She thus gains $2,000 of value that we lose by our own folly. This is a balance of trade that is better missed than found. Its advocates, however, call it national gain. I know what I say when I call it a dead loss; we might as well plunge two thousand dollars of gold into the sea.

Unpracticed thinkers find some difficulty in comprehending that the dollar is not a fixed value. Make it of gold, or make it a promise to pay gold, interchangeable with gold, and men, of whose intelligence better things should be expected fail to discover that an increase of supply depreciates its exchange value, precisely as every other instrument or object of commerce is depreciated in value. The dollar being the currency unit, the depreciation of its value exhibits itself only in the rise of general prices, and more dollars must be given in exchange for other values than before. When we add dollars of debt to our currency, interchangeable with dollars of gold, until six have no more purchasing power than four possessed before, it is inevitable that foreigners will take our dollars and leave our flour, until it gluts the home market insupportably, or its production is reduced to correspond with the demand. Thus we throw away capital and stop an equal amount of production by the same suicidal act—a double loss, like the difference to a merchant between making $2,000 and losing $2,000 which is $4,000 in his stock account.

Here an objector may say that with an open commerce gold cannot remain one-third cheaper in one country than in another, which is the same thing as saying that general prices cannot remain one-half or 50 per cent higher. On this point, what is supposed to be scientific teaching differs from the fact of experience, and, as science is simply experience classified, the theory must give way where it is contradicted by the well-observed fact. The fact is that under the operation of a currency of debt, which can be made to suit the interest of its producers, general prices can remain 50 per cent higher in one country than in another, or in all others, for an indefinite period, sometimes for several years, mainly because most of the values of every country are not objects of international exchange, but in a great degree because the makers of such a currency protect themselves by bond and security against its effects. They lend no value, no capital, but promises which create price without value, and throw upon their debtor the obligation to furnish the value and capital to pay the false price and meet such promises. Generally the currency-maker is protected and paid, but the value which is put into his hands to enable him to redeem his obligation he never loaned; it is robbing Peter to pay Paul, and Peter fails. A price that is not a value may be kited in the exchanges of domestic commerce for years, but when its ultimate payment in value is demanded, somebody must fail, for a value cannot be paid that never existed. It is, as I have on another occasion remarked, like circulating promises to deliver several Kohinoor diamonds, there being but one in existence; the promises may circulate so long as the issues are protected from an absolute demand for payment; but the one diamond being demanded and sent out of the country because its value is greater abroad than where the spurious promises circulate and cheapen it, the several promises for which there is no diamond to respond must be discharged by insolvency. Whether one diamond or millions of them, one dollar or millions of them, or anything else, form the basis of fictitious promises, a currency so constructed must plunder those who become bound with endorsers to save the issuers harmless. But while the issuers are saved, the currency can be maintained so as to inflate prices not merely 50 per cent but even 400 per cent beyond the natural money value, and yet under specie payment, as the experience of France with Law's banking and Mississippi scheme clearly shows.

Charles Mackay, in his historical sketch of the Mississippi scheme says:

The looms of the country worked with unusual activity to supply rich laces, silks, broadcloths, and velvets, which being paid for in abundant paper increased in price fourfold. Provisions shared the general advance; bread, meat, and vegetables were sold at prices greater than had ever before been known, while the wages of labor rose in exactly the same proportion. The artisan who formerly gained fifteen sous per diem now gained sixty.

This fourfold rise of general prices was nothing but a fall of three-fourths in the value of money, and the cheapened commodity, money, rushed out as fast as foreigners could pour other capital into France to exchange for it. Edicts of the Government, the most despotic, and persecution the most odious, were powerless to prevent this. Plate and expensive jewelry were secretly sent away to England and Holland, and ludicrous devices were adopted to escape the vigilance of the Government.

Vermalet, a jobber who sniffed the coming storm, procured gold and silver coin to the amount of nearly a million of livres, which he packed in a farmer's cart, and covered over with cow dung; he then disguised himself in a dirty smock frock, or blouse, and drove his precious load into Belgium. From thence he soon found means to transport it to Amsterdam.

Notwithstanding every effort to the contrary the precious metals continued to be conveyed to England and Holland. The little coin that was left in the country was carefully treasured or hidden, until the operations of trade could no longer be carried on.

Law then obtained an edict forbidding the use of specie altogether, which destroyed the credit of the bank paper irrevocably, and drove the country to the very brink of revolution. The illusion created by his system of banking, of which the Mississippi scheme was but an offshoot, lasted four years—1716 to 1720—when the iniquitous contrivance crumbled into ruin, destroying not traders only, but the fortunes of many of the wealthiest and best families of France.

No one having a knowledge of commerce, to say nothing of political economy, will deny that cost of production is an essential element of market value in every commodity, and also that the currency and demand of the consumer finally determines its selling price over and above the cost of production, and the effect of the high price he pays, if convertible into value, is to enhance the price and value of imports in the market of production. In every way and without exception the result of employing a paper or debt currency is to benefit the foreign to the damage of the home market. Thus France, under Law's currency scheme, became the dearest market to sell in the world.

The surplus products of every commercial nation must be sold at such rates as foreigners will pay, so that the producers of such products get no advantage from the paper inflation at home. Generally nations without mines of the precious metals, and without a paper currency, pay for their imports directly in their own products without difficulty, and without exporting gold and silver which they receive in their returns; and if we possessed statistics of the foreign commerce of France during the eventful four years of Law's experiment, I have no doubt we should find that her home products would have paid for all her imports, and did so in fact, if the imports had been reckoned at the natural money value, so that the money which made up the "balance of trade" in the excess of exports was completely thrown away. The kingdom would have been stripped of the precious metals at that time, virtually for nothing, but for the habit of hoarding among the people induced by a long-continued distrust of the government.

If what has been said is correct, then a protective tariff, which is with many the panacea for all the ills of commerce, and especially for what is thought to be an adverse balance of trade, is an evil. Of course, the object and the operation of the tariff is to raise the price of both foreign and domestic products to consumers, so that certain individuals may be enabled to direct the industry of the country into unnatural channels and supply the home market with commodities directly, that can be supplied cheaper indirectly through foreign commerce. And this, it is contended, by checking imports, will save our gold and silver coin and bring about the desired "balance of trade" in an excess of exports. That, with a debt currency, it tends to a nominal excess of exports there would seem to be no doubt, for the same reason that cheap money induces high prices, which cripple foreign commerce and change the export demand from merchandise to money. I repeat that while a debt currency circulates in the country, the money included in the excess of exports is thrown into the lap of other nations in payment of a false price for their products to our utter loss. The tariff promotes this loss by indirection, by raising our home prices and preventing profit in foreign trade, which would exhibit itself as it does in England in an excess of imports.

Has the tariff policy which has been pursued with rigor, but with vexatious irregularity, ever since the close of the War of 1812 saved to the nation the precious metals imported and mined here since that date? The answer to this question is to be found in the fact that not more than $200,000,000 probably remain in the country outside of the arts and hoards.